Managing Money In Trading

Develop a Money Management Strategy

Develop a money management strategy in your trading plan by determining how much you should trade. For example, if you have $100,000 in savings, entering a trade using all of your capital would not be the best course of action. If you did, and the trade went the wrong way, you could be taking a huge loss on one trade. When putting your trading plan together, decide on a dollar amount or percentage of your total capital that will be the maximum you will use for any one trade. This will help control the size of your losses. Many successful traders use 3-5% as a maximum per trade.

Manage Your Losers Using Stops

Set a maximum loss that you are willing to take on any one trade. This is called your “stop” – the amount at which you absolutely must get out of a trade. For example, you might want to set a stop at 5% of your initial investment in a single trade. Once that stock reaches a price 5% below what you paid for it, you must be disciplined enough to get out of the trade, regardless of what your emotions tell you. Remember that you can always get back in. The objective in setting stops is to keep losses to a minimum. You cannot lose money if you stop trading.

There are many ways to approach stops, and it partly depends on your style and overall strategy (day trading vs. swing trading vs. position trading). Choose an appropriate “stop” to include in your trading plan. As you gain experience, you can adjust your stops to better fit your goals.

Develop Discipline

It's not just the lack of discipline, but the lack of consistent discipline that is the major reason traders fail. When we speak of discipline while trading, we are referring to how strictly you follow your trading rules, whether you are keeping your stops, and whether you follow your game plan and trade only stocks that meet your criteria.

Why would you, as a trader, invest the time and energy to develop a trading plan and not follow your own rules? Usually, breaking rules is a result of focusing on how much money one can make, and not on controlling losses. It takes discipline to follow a sound risk management strategy. Being a disciplined trader means following your trading plan, even when you feel like you may not want to.

Be Accountable

Establish your own accounting system to track your trading results and reconcile brokerage reports. A simple Excel spreadsheet with daily, weekly, and monthly results is all you'll need. You should include gross profit/loss, number of trades, commission costs, ECN costs, other costs, net profit/loss, equity (be sure it matches brokerage reports) and any other data that will help. Use this data to improve your trading. Look for patterns in your results, and profit-to-cost relationships.

For example, you may notice that you make better decisions Monday through Wednesday than you do on Thursday or Friday. Maybe you don't watch the market as closely on Thursdays because of late Wednesday nights, or maybe you're not as focused on Fridays because you're distracted by the upcoming weekend. Whatever it is, if the pattern continues over time you will be able to determine what it is that's making the difference in your trading. This will allow you to make necessary adjustments to your trading plan.

It is also important to keep a good filing system with daily printouts . This will give you the information you need to verify all of your trades for the day, and can be matched with brokerage reports. Because no one is going to take care of your money the way you do, mistakes can happen.